By Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) – The yen’s slide to a new 34-year low is likely to force Bank of Japan Governor Kazuo Ueda to walk a delicate line in steering monetary policy this week as he tries maintain a calibrated path to exiting the ultra-easy interest rate without flipping the coin.
The BOJ chief will be careful to avoid the 2022 episode, when his predecessor’s dovish comments triggered a yen plunge that forced Tokyo to intervene to support the currency.
Ueda has ruled out the likelihood of aggressive rate hikes due to Japan’s fragile economy, which has partly fueled expectations of low interest rates and encouraged yen gains.
However, in recent comments, Ueda has hinted that the BOJ could raise borrowing costs again later this year, although that has done little to reverse the yen’s inexorable decline in recent months.
The BOJ is expected to hold rates steady at a two-day meeting ending on Friday and expects inflation to remain near its 2% target in coming years on prospects for steady wage increases.
The prospect of Japanese interest rates remaining low for an extended period and expectations of a delayed start to US interest rate cuts continue to weigh on the yen, despite the aggressive stance of the Japanese authorities.
The yen fell below 155 against the dollar on Thursday, a level seen as a line in the sand by authorities that increases the likelihood of currency intervention.
The dollar rose to 155.37 yen on Wednesday, the strongest since mid-1990, before falling back in choppy trading. It was last at 155.29 in Asia on Thursday.
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“There is no change in our position. We will closely monitor market movements and respond appropriately,” Finance Minister Shunichi Suzuki told parliament on Thursday, as an opposition lawmaker urged intervention in the currency market.
Chief Cabinet Secretary Yoshimasa Hayashi also said Japanese authorities were ready to take action if necessary.
“It is important that exchange rates move stably and reflect fundamentals. Excessive volatility is undesirable,” Hayashi said at a news conference. He declined to comment on the yen’s recent moves, or on the possibility of currency intervention.
Markets are focusing on whether BOJ’s Ueda will take a more hawkish tone on the prospects for a near-term rate hike.
“The BOJ will not raise rates just to prevent the yen from falling,” said former BOJ official Nobuyasu Atago.
“But he may repeat his recent comments that the BOJ would react if yen moves have a major impact on the economy and prices. If that makes markets think the timing of a rate hike could be pushed back, that would be a be an effective jaw-dropper.”
Ueda will hold a press conference on Friday after the two-day meeting.
REPETITION OF 2022?
Some analysts point to the risk of a repeat of September 2022, when Japan stepped in to support the yen after it collapsed following former BOJ Governor Haruhiko Kuroda’s comments after the meeting, which highlighted the bank’s determination to to maintain ultra-flexible policies.
In Japan, the Ministry of Finance, not the BOJ, is responsible for deciding when to intervene in the foreign exchange market. The decision is highly political in nature and generally reflects the government’s view on whether movements in the yen warrant action.
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However, within the ruling Liberal Democratic Party (LDP), there appears to be no consensus on whether the time is right for currency intervention.
Japan’s ruling party is not yet actively discussing which levels of the yen are worth intervening in the market, although the currency’s slide towards 160 against the dollar could spur policymakers into action, party leader Takao Ochi told Reuters.
Markets are also focusing on whether the BOJ will leave unchanged its guidance offered in March to continue buying government bonds at around the current pace of 6 trillion yen per month.
Removing or adjusting the guidance could be interpreted by markets as a suggestion that the BOJ will soon taper its bond purchases to push bond yields higher, analysts say.
Alternatively, the BOJ could announce a modest reduction in its bond purchasing plans for May, which will be announced after the policy meeting, some analysts say.
Ueda said at a seminar in Washington last week that the BOJ will eventually shrink its balance sheet and roll out the process regardless of the state of the economy.
But Ueda has stressed that the BOJ will not dramatically change the pace of its bond purchases for a while and will not use the size of its asset purchases as a monetary policy tool.
